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ERM Glossary: Risk diversification

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Risk diversification involves taking on a variety of imperfectly correlated exposures. It is a simple way in which an enterprise can mitigate risk. However, the degree of diversification any particular implementation offers may be hard to assess as the correlations (co-movements between positions) may behave differently from what is expected. This is often viewed as particularly true in a crisis period, as correlations may then be higher than in normal periods.

 


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